First Things First

This post focuses on strategic versus financial acquirers. A critical decision is how to fund an acquisition.  CFOs need to translate strategy into its financial implications, and then access capital to ensure its realization. There is a temptation to increase leverage to make the deal look better.  While you need to take risk to make money, you do not make money for taking risk. Risk and return are correlated. Risk does not create return. Equally true, leverage does not create value-it just magnifies outcomes.

The real source of acquisition value comes from buying synergies at less than their full value, and not from funding. This requires the ability to realize the potential synergies. This in turn requires the flexibility to operate without tough covenant restrictions. Also, you need to maintain capital market access under most market conditions-good and bad-not just the current conditions. Bad things happen when capital structures collide with markets they were not designed to withstand.

This translates into a mid level "A" type capital structure. Thus, post acquisition funded debt to earnings before interest, taxes and amortization levels should be below 3 times for most firms. If you need to increase leverage to justify a deal, then something is wrong with the deal.  We’ll have more detail on this and the differences for strategic and financial acquirers  later and, of course, in our acquisition finance course.

Joe